GMP Equalisation Tax: HMRC Guidance
Long-awaited guidance on the tax implications of Guaranteed Minimum Pension (GMP) equalisation has been published by HMRC. However, there are still significant concerns around some areas.
What’s the background?
In October 2018, the High Court handed down a landmark ruling1 that all GMP benefits in UK pension plans must be equalised for males and females. The decision impacted at least 80 per cent of UK defined benefit schemes (having contracted out of state pension arrangements).
Various methods of equalisation to effectively rectify this equality are possible but, in turn, these raise a number of associated tax implications. It also meant significant concerns around the costs for employers and the complexities of GMP equalisation. Many employers have been uncertain how to respond.
Guidance
HMRC’s guidance was finally published in February (it was expected at the end of last year) and deals with various pensions tax implications arising out of equalising benefits for GMP equalisation following Lloyds. It does not extend to any other benefit adjustments that happen at the same time.
Note that this guidance supplements existing guidance in the Pensions Tax Manual relating to benefit adjustments for registered pension schemes with periods of contracted out pensionable service between 17 May 1990 and 5 April 1997.
Unsurprisingly, the Lloyds case is highlighted though HMRC has not commented on the individual methods used for equalisation, stating that it is for the trustees and employers of each pension scheme to decide on the most appropriate method for their scheme.
The guidance covers tax issues such as:
· Annual allowance, including deferred member carve-out; and
· Lifetime allowance, including fixed, primary, individual and enhanced protection
It states that for the most part, GMP equalisation benefit adjustments, on their own, would not constitute new accrual of benefit that should be tested for annual allowance purposes or which would prejudice applicable lifetime allowance protections. However, such adjustments may impact the amount of any previous and future benefit crystallisation events.
HMRC clarifies its position in relation to arrangements in the context of annual allowance (pre-6 April 2006 deferred members; deferred members otherwise covered by the ‘deferred member carve-out’ and other deferred members and active members).
So, for example, anyone who became a deferred member under an arrangement before 6 April 2006 and has remained outside of the annual allowance provisions since then in relation to that arrangement, should continue to do so. Any adjustment then made should simply reflect the benefit the member had accrued before 6 April 2006.
As for individuals covered by “deferred member carve-out”, they will not be affected by GMP equalisation because benefit adjustments “are attributable solely” to the application of equality legislation and so fall within the statutory increases permitted.
Lastly, in the case of other deferred members and active members, HMRC says it not necessary to revisit pension input amount calculations done in the past. Therefore, calculations for the pension input amount in the tax year of implementing GMP equalisation and tax years thereafter will need to take into account the revised amount of the benefit entitlement in both the opening and closing benefit calculations.
The guidance goes on to consider the various lifetime allowance protections confirming, for example, that someone with a fixed protection will retain it because any increase solely for GMP equalisation will not be a benefit accrual.
The guidance also touches on LTA and benefit crystallisation events and how a GMP equalisation benefit adjustment could trigger such an event.
More practically, the guidance gives helpful pointers to scheme members as to how a previously submitted self-assessment tax return should be corrected if necessary. Trustees are expected to account for any charge due directly to HMRC through their Accounting for Tax return.
The full guidance can be found here.
The rules are complex and further guidance from HMRC can be expected. In the meantime, it is wise to take specialist advice from expert tax solicitors on how you or your pension scheme could be affected, and steps you can take.
1Lloyds Banking Group Pensions Trustees LTD v Lloyds Bank plc & others [2018] EWHC 2839